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CHAPTER 4 ACCOUNTING FOR BRANCHES; COMBINED FINANCIAL STATEMENTS

The title of each problem is followed by the estimated time in minutes required for completion and by a difficulty rating. The time estimates are applicable for students using the partially filled-in working papers. Pr. 41 Hartman, Inc. (20 minutes, easy) Journal entries for home office and branch to record shipments of merchandise, payment of freight costs, ending inventories under the periodic inventory system, and other year-end adjustments. Lobo Company (20 minutes, easy) Reconciliation of reciprocal ledger accounts for home office and branch; journal entries to bring accounting records up to date. Styler Corporation (30 minutes, easy) A branch obtains merchandise from the home office at billed prices above home office cost. Branch inventories are damaged by fire. Compute the loss from the fire and recognize the loss in the accounting records of both the branch and the home office. Yugo Company (30 minutes, easy) Determine unadjusted balance of the Home Office account in branch accounting records, prepare journal entries to bring home office and branch accounting records up to date, and reconcile reciprocal ledger accounts at year-end. Periodic inventory system is used. Trudie Company (40 minutes, easy) Journal entries for home office and branch when merchandise is billed to branch at prices above home office cost. Different sets of journal entries under perpetual and periodic inventory systems. Kosti-Marian Company (60 minutes, medium) Preparation of year-end journal entries and a working paper for home office and branch with emphasis on the reconciliation of cash records and the handling of inventories under the periodic inventory system. Home office bills merchandise to the branch at prices above home office cost. Solis Company (30 minutes, medium) Given the trial balances of the home office and the branch, prepare adjusting and closing entries and a working paper for combined financial statements. Perpetual inventory system is used by both home office and branch. Calco Corporation (50 minutes, medium) Journal entries to bring home office and branch accounting records up to date. Working paper to summarize operations for year. Both home office and branch office use the periodic inventory system. Kreshek Company (60 minutes, medium) Reconciliation of home office and branch ledger accounts when errors have been made by both offices and certain transactions have been recorded by only one office. Adjusting entries in both sets of accounting records. Both home office and branch use the perpetual inventory system.

Pr. 42

Pr. 43

Pr. 44

Pr. 45

Pr. 46

Pr. 47

Pr. 48

Pr. 49

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Pr. 410

Arnies (60 minutes, strong) Preparation of year-end journal entries and a working paper for combined financial statement of home office and branch under the perpetual inventory system. Closing entries for home office.

ANSWERS TO REVIEW QUESTIONS


1. The transactions to be accounted for by the branch generally should include only controllable expenses for which the branch manager is responsible. For example, depreciation of plant assets usually follows policies set by the home office and is not subject to control by the branch manager. This situation suggests that both the branch plant assets records and the related depreciation records should be maintained by the home office. The Home Office ledger account in the branch accounting records is reciprocal to the Investment in Branch account in the home office accounting records. These two accounts show the same thing the net assets of the branchfrom two different points of view. The Home Office account maintained by the branch has a credit balance and may be considered quasi-ownership equity; the Investment in Branch account maintained by the home office has a debit balance and is a noncurrent asset that reflects the net investment in the branch by the home office. Another pair of reciprocal ledger accounts is used to record shipments of merchandise from the home office to the branch when the periodic inventory system is used. In the home office accounting records, the account is Shipments to Branch (a Purchases valuation account) and has a credit balance; in the branch accounting records, the account is Shipments from Home Office (a purchases-type account) and has a debit balance. Reciprocal ledger accounts should be reconciled and brought up to date at the end of each accounting period. The reciprocal accounts are eliminated in the preparation of combined financial statements of the home office and the branch. For a home office to bill merchandise shipments to its branches at or above home office cost is acceptable. If branches are billed at amounts above home office cost, the home office eliminates the excess of billed prices over cost when the account balances of the home office and the branch are combined in the preparation of combined financial statements. To the extent that the merchandise has been sold by the branches before financial statements are prepared, the "excess" will have been realized, and the combined net income will be the same as if the merchandise had been billed at home office cost. Merchandise not sold is valued at cost in the combined balance sheet. Alternative methods for billing merchandise to branches are acceptable because they give the same results in the combined financial statements when appropriate eliminations are made. The separate financial statements prepared by individual branches and by the home office indicate the operating results and financial position of each unit of Jesse Corporation. The statements are used to evaluate the performance of branch managers and suggest the most appropriate areas for expansion or closure of branches. The combined financial statements serve the needs of managers in the analysis of operating results and financial position of the enterprise as a whole. Combined financial statements also are more appropriate for use by outsiders such as stockholders and creditors. To record the acquisition of equipment to be carried in the home office, Slauson Branch debits Home Office and credits Cash for $17,000. The home office debits Equipment: Slauson Branch and credits Investment in Slauson Branch for $17,000. A home office's Allowance for Overvaluation of Inventories: Branch ledger account is used to reduce to cost the component of the balance of the Investment in Branch ledger account represented by shipments of merchandise to the branch at a markup over home office cost. When such a shipment is made, the allowance account is credited for the excess of billed price over home office cost of the shipment. At the end of an accounting period, the home office prepares a journal entry debiting the allowance account and crediting Realized Gross Profit: Branch Sales for the amount of the markup realized by the branch through sales of merchandise to outsiders. Thus, the end-of-

2.

3.

4.

5.

6.

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7.

8.

period adjusted balance of the allowance account represents unrealized markup in the branch's ending inventories acquired from the home office. The factors that would cause the reciprocal ledger accounts to be out of balance may be classified into the following groups: (1) Intracompany transactions between home office and branch, such as shipments of merchandise or cash transfers by the home office to the branch, recorded by the home office but not recorded by the branch. (2) Intracompany transactions between branch and home office, such as transfers of cash by the branch to the home office, recorded by the branch but not recorded by the home office. (3) Errors made by the home office or the branch (or both) in recording intracompany transactions. Ford Branch of Ralph Company should debit the Home Office ledger account and credit the Inventories account. Gates Branch should not absorb more freight costs than if the goods had been shipped directly from the home office. Normal freight costs of shipping merchandise to branches are added to the carrying amount of inventories, but excess freight costs are losses from poor planning and are recognized as expenses of the home office.

SOLUTIONS TO EXERCISES
Ex. 41 1. 2. 3. 4. 5. 6. 7. c b c a c c a 2005 Sept. 1 2 8. a 9. a 10. d 11. d 12. a (.20 1.20 = 16 2/3%) 13. b

Ex. 42

a. Journal entries in accounting records of home office: Investment in San Marino Branch Cash Investment in San Marino Branch Inventories Allowance for Overvaluation of Inventories: San Marino Branch ($60,000 x 0.25) 10,000 10,000 75,000 60,000 15,000 3,000 3,000

Equipment: San Marino Branch Investment in San Marino Branch b. Journal entries in accounting records of San Marino Branch: 2005 Sept. 1 Cash Home Office 2 3 Inventories [$60,000 (1.00 0.20)] Home Office Home Office Cash

10,000 75,000 3,000

10,000 75,000 3,000

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Ex. 43

a. Journal entries in accounting records of home office: 2005 Sept. 1 Investment in Eastern Branch Cash 4 Investment in Eastern Branch Shipments to Eastern Branch Allowance for Overvaluation of Inventories: Eastern Branch 11 Equipment: Eastern Branch Investment in Eastern Branch b. Journal entries in accounting records of Eastern Branch: 2005 Sept. 3 Cash Home Office 8 Shipments from Home Office Home Office 11 Home Office Cash 50,000 50,000 125,000 95,000 30,000 34,200 34,200

50,000 50,000 125,000 125,000 34,200 34,200

Ex. 44

Journal entries for Wilshire Branch of Watt Corporation: 2005 Jan. 2 Inventories Home Office To record merchandise shipped by home office. 18 Home Office Cash To records acquisition of equipment to be carried in home office accounting records. 31 Operating Expenses Home Office To records operating expenses allocated by home office. 100,000 100,000 5,000 5,000

8,000 8,000

Ex. 45

Journal entries for home office of Usc Company: 2005 Jan. 10 Investment in Hoover Street Branch Inventories ($60,000 x 0.80) Allowance for Overvaluation of Inventories: Hoover Street Branch ($60,000 x 0.20) To record shipment of merchandise to branch at a markup of 20% of billed price. 60,000 48,000 12,000

25 Investment in Hoover Street Branch 25,000 Trade Accounts Receivable To record collection of trade account receivable by branch. 31 Investment in Hoover Street Branch Operating Expenses To record operating expenses allocated to branch. 18,000

25,000

18,000

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Ex. 46

Journal entries for Lido Branch of Turbo Company: 2005 Aug. 6 Trade Accounts Payable Home Office 14 22 Home Office Trade Accounts Receivable Home Office Cash

10,000 10,000 6,000 6,000 20,000 20,000 15,000 5,000 10,000 1,500 1,500 416 400 16

Ex. 47

Journal entries for home office of Wardell Company: a. Investment in Branch Cash Inventories b. Investment in Branch Operating Expenses c. Investment in Branch Notes Receivable Interest Revenue d. No journal entry required e. Investment in Branch Income: Branch Journal entries for Exeter Branch of Wardell Company: a. Cash Inventories Home Office b. Operating Expenses Home Office c. Cash Home Office d. Trade Accounts Receivable Operating Expenses Cost of Goods Sold Sales Cash Inventories e. Income Summary Home Office

500 500 5,000 10,000 15,000 1,500 1,500 416 416 12,500 2,500 8,000 12,500 2,500 8,000 500 500 20,000 750 20,000 750

Ex. 48

Journal entry on Dec. 31, 2005, for Davis Branch of Leland Company: Home Office Accumulated Depreciation of Equipment Equipment Depreciation Expense To correct accounting for equipment acquired and depreciation expense Journal entry on Dec. 31, 2005, for home office of Leland Company: Depreciation Expense: Davis Branch Equipment: Davis Branch Accumulated Depreciation of Equipment: Davis Branch

750 20,000 750

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Investment in Davis Branch To record equipment acquired by Davis Branch and related depreciation. Ex. 49 FIGUEROA COMPANY Flow of Merchandise for Nine-Zero Branch For Month Ended January 31, 2005 Billed Price $120,000 500,000 $620,000 100,000 $520,000 Cost $ 96,000 400,000 $496,000 80,000 $416,000 Debit Markup $ 24,000 100,000 $124,000 20,000 $104,000 Credit 90,000 100,000 80,000

20,000

Beginning inventories Add: Shipment from home office Available for sale Less: Ending inventories Cost of goods sold Ex. 410 Date 2005 Mar. 31 Apr. 16 30 Ex. 411 Explanation

Allowance for Overvaluation of Inventories: 32 Branch Balance 30,000 cr 120,000 cr 20,000 cr

Balance Shipment to branch Realized gross profit on branch sales

Journal entries for home office of Trapp Company, May 31, 2005: Investment in Portland Street Branch Income: Portland Street Branch Allowance for Overvaluation of Inventories: Portland Street Branch ($200,000 $60,000) Realized Gross Profit: Portland Street Branch Sales Income: Portland Street Branch Realized Gross Profit: Portland Street Branch Sales Income Summary 80,000 140,000 140,000 80,000 140,000 220,000 46,000 46,000

Ex. 412

a. $48,000 ($80,000 $32,000). The billed price equals $32,000 0.40, or $80,000. b. Allowance for Overvaluation of Inventories: Toledo Branch Realized Gross Profit: Toledo Branch Sales To adjust allowance account in the accounting records of home office, as follows: Balance, Mar. 1, 2005 $32,000 Increase during March ($60,000 $36,000) 24,000 Balance before adjustment $56,000 Less: Balance, Mar. 31, 2005 ($25,000 x 0.40) 10,000 Required reduction in allowance account $46,000

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Ex. 413

Journal entries for home office of Glendale Company: 2005 Sept. 17 Investment in Montrose Branch Inventories Allowance for Overvaluation of Inventories: Montrose Branch To record shipment of merchandise to branch at a markup of 25% on billed price, as follows: Markup ($400,000 x 0.25 = $100,000) Cost ($400,000 x 0.75 = $300,000) 30 Allowance for Overvaluation of Inventories: Montrose Branch Realized Gross Profit: Montrose Branch Sales To recognize as realized gross profit the markup of merchandise applicable to goods sold by branch during September, 2005, as follows: [($60,000 + $100,000) ($160,000 x 0.25) = $120,000]

400,000 300,000 100,000

120,000 120,000

Ex. 414

Journal entries for home office of Searl Company, Jan. 31, 2005: Investment in Vermont Avenue Branch Income: Vermont Avenue Branch Allowance for Overvaluation of Inventories: Vermont Avenue Branch ($80,000 $27,000) Realized Gross Profit: Vermont Avenue Branch Sales Income: Vermont Avenue Branch Realized Gross Profit: Vermont Avenue Branch Sales Income Summary 60,000 60,000 53,000 53,000 60,000 53,000 113,000 30,000 24,000 6,000 5,100 5,100 $3,000 6,000 $9,000 3,900 $5,100

Ex. 415

Journal entries in accounting records of home office of Gomez Company for 2005: Investment in Perez Branch Shipments to Perez Branch Allowance for Overvaluation of Inventories: Perez Branch To record shipments to branch at a markup of 25% above cost. Allowance for Overvaluation of Inventories: Perez Branch Realized Gross Profit: Perez Branch Sales To adjust allowance account as follows: Balance, Jan. 1, 2005 ($15,000 x 0.20) (A 25% markup on cost is equal to a 20% markup on billed price.) Increase during 2005 ($30,000 x 0.20) Balance before adjustment Less: Balance, Dec. 31, 2005 ($19,500 x 0.20) Required reduction in allowance account

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Ex. 416

a. Computation of estimated cost of merchandise destroyed by fire at branch of Samore, Inc., Jan. 28, 2005: Inventories, Jan. 1, 2005 (billed price) $15,600 Add: Shipments from home office, Jan. 1 to Jan. 28 (billed price) 71,500 Merchandise available for sale, Jan. 1 to Jan. 28 (billed price) $87,100 Billed price of net merchandise sold: [($51,840 $3,220) 1.10] 44,200 Estimated inventories, Jan. 28, 2005 (billed price) $42,900 Less: Inventories not damaged ($7,150 1.10) 6,500 Estimated inventories destroyed (billed price) $36,400 Less: Valuation in excess of cost ($36,400 x 3/13*) 8,400 Estimated cost of merchandise destroyed by fire, Jan. 28, 2005 $28,000 *A 30% markup on cost is equal to a 3/13 markup on billed price. b. Journal entry to record loss in accounting records of branch, Jan. 28, 2005: Loss from Fire Inventories To record estimated carrying amount of merchandise destroyed by fire. 36,400 36,400

Ex. 417

a. Journal entry for the home office of Argos Company: 2005 May 31 Cash in Transit Investment in Troy Branch b. Journal entries for Troy Branch of Argos Company: 2005 May 31 31 Inventories in Transit Home Office Home Office Trade Accounts Receivable

10,000 10,000

280,000 280,000 50,000 50,000

CASES
Case 41 Although the appropriate interpretation of Lewis Hanson's contract with Longo Company probably requires a legal opinion, logic suggests that neither Hanson's view nor the Longo controller's view is appropriate. Absent any provision in Hanson's contract to the contrary, the method used by the branch accountant to measure net income of Santee Branch during its operating phase should be applied to Santee's last operating period. The resultant net loss precludes a bonus to Hanson, but "tinkering" with the measurement of branch net income appears unsupportable with respect to both Hanson's suggestion and the Longo controller's suggestion. Before deciding on an answer to the case, it is appropriate to consider the following pronouncements of the Financial Accounting Standards Board in Statement of Financial Accounting Concepts No. 6, Elements of Financial Statements (CON 6); Statement of Financial Accounting Standards No. 5, Accounting for Contingencies (FAS 5); Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. Assets are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events. (CON 6, para. 25) Contingencies that might result in gains [contingent assets] usually are not reflected in the accounts since to do so might be to recognize revenue prior to its realization. (FAS 5, para. 17a) Expenses are outflows or other using up of assets or incurrences of liabilities (or a combination of both) from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity's ongoing major or central operations. (CON 6, para. 81) Losses are decreases in equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity except those that result from expenses or distributions to owners. (CON 6, para. 83)
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Case 44

Costs of internally developing, maintaining, or restoring intangible assets (including goodwill) that are not specifically identifiable, that have indeterminate lives, or that are inherent in a continuing business and related to an entity as a whole, shall be recognized as an expense when incurred. (FAS 142, para. 10) Given the foregoing definitions, there is no support for Fortunato Company's deferral of pre-operating costs incurred for the new branch. Apart from the costs of testing the manufacturing equipment, which may be capitalized as part of the cost of the equipment, all remaining start-up costs should be recognized either as expenses or as losses. Because of the uncertainty as to when, if ever, regulatory agency approval for the branch's production and sale of products will be obtained, the probable criterion for the recognition of an asset is not met. Given such uncertainty, Robert Engle's characterization of the pre-operating costs as contingent assets is appropriate; they are not to be recognized until realized. The costs incurred other than for testing equipment, research, and development, do not qualify as expenses because they do not result from delivering or producing goods. Thus, recognition of such costs as losses appears to be an appropriate course of action for Fortunato Company. Kevin Carter's dilemma is a difficult one. The cost-benefit aspects of any course of action he selects must be considered. However, the current practice for plugging differences between reciprocal ledger accounts of the home office and branches of Oilers, Inc., should be forbidden at once. At the same time, an independent audit of Oilers' financial statements would be prohibitively expensive, given the chaotic state of the accounting records. Adjusting the 14 branches' Home Office ledger account balances to agree with the home office's reciprocal account balances is the least costly alternative; if it is accompanied by strong measures to ensure future monthly reconciliations of the reciprocal account balances, it might suffice. However, Carter might elect to select one of the 14 branches for a detailed analysis of differences between the reciprocal ledger account balances; such a course of action might disclose a pattern of recurring errors common to other branches and facilitate discovery of most, if not all, of the reconciling items. TO: The Board of Directors, Windsor Company FROM: ___________________________________________, Controller DATE: ________________________ SUBJECT: Separate Financial Statements for Southwark Branch You have asked my opinion as to whether separate financial statements for Southwark Branch may be prepared for its prospective purchaser. My review of professional literature leads me to conclude that the statements may be prepared. In reaching my conclusion, I considered the following: AICPA Professional Standards, Volume 2; Section ET92.04 Definition of financial statements Section AR100.04 Definition of financial statements Statement of Financial Accounting Concepts No. 1, Objectives of Financial Reporting by Business Enterprises, par. 6 Most frequently provided financial statements (CON 1)

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Case 45

Statement of Financial Accounting Concepts No. 6, Elements of Financial Statements, par. 24 Nature of accounting entity (CON 6) Statement of Financial Accounting Standards No. 57, Related Party Disclosures, par. 2 Disclosure of material related party transactions (FAS 57) I have concluded that Southwark Branch is an accounting entity, as described in CON 6. Based on the references in ET92.04, AR100.04, and CON 1, I believe that a statement of assets and liabilities; a statement of revenues, expenses, and changes in net assets; and a statement of cash flows are appropriate for Southwark Branch. Because the branch is a segment of Windsor Company, I do not believe a statement of financial position (balance sheet), an income statement, and a statement of owner's equity are appropriate for it. Thus, the question you raised regarding an equity section of a balance sheet is moot. The statement of assets and liabilities would have total liabilities of Southwark Branch subtracted from its total assets, with a bottom line of net assets, which would carry the after-closing balance of the branch's Home Office ledger account. The unrealized intracompany markup above cost in the branch's ending inventory would be disclosed in a note to Southwark Branch's financial statements that describes the intracompany transactions with the home office of Windsor Company in accordance with FAS 57. Please inform me if I can be of further service. a. Lola Branch should have prepared a journal entry to recognize the $2,640 liability incurred under the installment contract, with related debits to Home Office for the cash price of the equipment ($2,400) and to Discount on Installment Contract Payable for the interest portion of the contract. Monthly payments of $110 should have been applied to reduce the installment contract liability, and an appropriate amount of interest expense applied to reduce the discount by the interest method. The sale of the office equipment required recognition of a $900 loss ($2,400 $1,500 = $900); an accompanying entry should have recorded the payoff of the balance of the installment contract, $2,090 [$2,640 ($110 x 5) = $2,090]; the forgiveness of $150 of the unamortized discount on the contract, with the remaining discount recognized as interest expense; and the recognition of a liability to the branch manager for his $440 ($2,090 $150 $1,500 = $440) payment of the balance of the installment contract in excess of the $1,500 sales proceeds of the office equipment. b. The home office of Langley, Inc., should have prepared journal entries as follows: (1) Recognize Lola Branch's acquisition of the office equipment with a debit to Office Equipment: Lola Branch and a credit to Investment in Lola Branch, $2,400. (2) Recognize depreciation for five months on the equipment with debits to Depreciation Expense: Lola Branch and credits to Accumulated Depreciation of Office Equipment: Lola Branch, $20 each ($2,400 x 0.10 x 1/12 = $20). (3) Reverse entry (1) when Lola Branch disposed of the office equipment. c. Correcting journal entry, Dec. 31, 2005, in accounting records of Lola Branch: Interest Expense ($240 $150) 90 Loss on Disposal of Office Equipment 900 Miscellaneous Expense ($110 x 5) 550 Payable to Manager of Lola Branch 440 To record interest expense from installment contract transaction, loss on disposal of equipment, and liability to branch manager for personal funds used to pay off installment contract.

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d. Correcting journal entries, Dec. 31, 2005, in accounting records of home office: Office Equipment: Lola Branch 2,400 Depreciation Expense: Lola Branch 100 Office Equipment: Lola Branch Accumulated Depreciation of Office Equipment: Lola Branch To record acquisition of equipment by branch, depreciation for five months, and subsequent disposal (loss on disposal will be included in net income or loss reported by Lola Branch to home office). Accumulated Depreciation of Office Equipment: Lola Branch Investment in Lola Branch To write off accumulated depreciation of equipment disposed of by branch. 100

2,400 100

100

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20 Minutes, Easy Hartman, Inc. Hartman, Inc. Reno Branch Journal Entries
Shipments from Home Office ($300,000 x 1.20) Freight In Home Office To record merchandise received from home office and freight costs of $15,000. Cash Sales To record sales for 2005. Operation Expenses Cash To record payment of expenses. Inventories, Dec. 31, 2005 [$72,000 + ($15,000 x 1/5)] Sales Shipments from Home Office Freight In Operating Expenses Income Summary To record ending inventories and to close revenue and expense ledger accounts. Ending inventories include one-fifth of $15,000 freight costs, because merchandise on hand equals one-fifth of the years shipments ($72,000 $360,000 = 1/5). Income Summary Home Office To close Income Summary ledger account. 9 6 0 0 0 3 6 0 0 0 0 1 5 0 0 0

Pr. 41

3 7 5 0 0 0

4 5 0 0 0 0 4 5 0 0 0 0

9 6 0 0 0

7 5 0 0 0 4 5 0 0 0 0 3 6 1 9 5 0 5 6 4 0 0 0 0 0 0 0 0 0 0 0 0

5 4 0 0 0 5 4 0 0 0

Hartman, Inc. Home Office Journal Entries


Investment in Reno Branch Shipments to Branch Allowance for Overvaluation of Inventories Reno Branch ($300,000 x 0.20) Cash To record shipment to branch of merchandise with cost of $300,000 and payment of $15,000 freight costs. Investment in Reno Branch Income : Reno Branch To record net income reported by branch.
Allowance for Overvaluation of Inventories: Reno Branch

3 7 5 0 0 0 3 0 0 0 0 0 6 0 0 0 0 1 5 0 0 0

5 4 0 0 0 5 4 0 0 0

4 8 0 0 0 4 8 0 0 0

Realized Gross Profit: Reno Branch Sales To reduce allowance to amount by which ending inventories are in excess of cost: $60,000 ($72,000 x 1/6) = $48,000.

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20 Minutes, Easy Lobo Company a. Lobo Company Home Office and Wade Branch Reconciliation of Reciprocal Accounts January 31, 2005
Investment in Wade Branch ledger account (in home office accounting records) Balances before adjustments Add: Shipment of merchandise to branch Payment of branch trade accounts payable by home office Less: Acquisition of furniture (carried in accounting records of home office) Collection of branch trade accounts receivable Return of merchandise to home office Remittance of cash by branch Balances after adjustments $ 4 8 5 0 0 dr

Pr. 42

Home Office ledger account (in Wade Branch accounting records) $ 3 5 7 0 0 cr 6 0 0 0 2 0 0 0

( 1 2 0 0 ) ( 1 1 0 0 ) ( 2 2 0 0 ) ( 2 5 0 0 ) $ 4 2 6 0 0 dr $ 4 2 6 0 0 cr

b.

(1)

Lobo Company Journal Entries in Accounting Records of Home Office

20 05 Jan 31 Furniture: Wade Branch Investment in Wade Branch To record acquisition of furniture by branch. 31 Cash in Transit Inventories in Transit Investment in Wade Branch To record cash and merchandise in transit from branch.

1 2 0 0 1 2 0 0

2 5 0 0 2 2 0 0 4 7 0 0

b.

(2)

Lobo Company Journal Entries in Accounting Records of Wade Branch

20 05 Jan 31 Inventories in Transit Home Office To record shipment of merchandise in transit from home office. 31 Home Office Trade Accounts Receivable To record collection of branch trade accounts receivable by home office. 31 Trade Accounts Payable Home Office To record payment of branch trade accounts payable by home office.

6 0 0 0 6 0 0 0

1 1 0 0 1 1 0 0

2 0 0 0 2 0 0 0

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30 Minutes, Easy Styler Corporation Styler Corporation Data Relating to Merchandise at Branch January 1 through March 10, 2005
Billed prices, Home office cost Beginning inventories, Jan 1 Add: Shipments from home office Goods available for sale Net sales by branch Inventories on date of fire, Mar. 10 Inventories after fire, Mar. 10 Loss from fire, Mar. 10 $ 1 5 0 0 0 4 8 0 0 0 $ 6 3 0 0 0 3 4 0 0 0 $ 2 9 0 0 0 1 2 5 0 0 $ 1 6 5 0 0 120% of home office cost $ 1 8 0 0 0 5 7 6 0 0 $ 7 5 6 0 0 4 0 8 0 0 $ 3 4 8 0 0 1 5 0 0 0 $ 1 9 8 0 0 Selling

Pr. 43

prices, 110% of billed prices $ 1 9 8 0 0 6 3 3 6 0 $ 8 3 1 6 0 4 4 8 8 0 $ 3 8 2 8 0 1 6 5 0 0 $ 2 1 7 8 0

a.

Styler Corporation Journal Entries in Accounting Records of Branch March 10, 2005

Loss from Fire Inventories To record loss of merchandise in fire, at prices billed to branch by home office. Home Office Loss from Fire To close Loss from Fire ledger account.

1 9 8 0 0 1 9 8 0 0

1 9 8 0 0 1 9 8 0 0

b.

Styler Corporation Journal Entries in Accounting Records of Home Office March 10, 2005

Loss from Fire: Branch Allowance for Overvaluation of Branch Inventories Investment in Branch To record loss of merchandise at branch and to adjust allowance account by excess of billed prices of merchandise destroyed over cost to home office.

1 6 5 0 0 3 3 0 0 1 9 8 0 0

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30 Minutes, Easy Yugo Company a. Yugo Company Computation of Unadjusted Balance of Home Office Account December 31, 2005
Balance of investment in Ryble Branch ledger account of home office, before adjustment Add: Collection by branch of home office trade accounts receivable Subtotal Less: Merchandise in transit to branch Error in recording branch net income ($840 $480) Supplies returned by branch to home office Balance of Home Office ledger account of Ryble Branch before adjustments $ 5 8 0 0 3 6 0 2 2 0

Pr. 44

$ 5 5 5 0 0 5 6 0 $ 5 6 0 6 0

6 3 8 0 $ 4 9 6 8 0

b.

Yugo Company Journal Entries in Accounting Records of Home Office December 31, 2005
(1) No journal entry required. (2) Investment in Ryble Branch Trade Accounts Receivable To record collection by branch of home office trade accounts receivable. (3) Investment in Ryble Branch Charitable Contributions To correct accounts for improper journal entry to record remittance of cash to branch. (4) Income: Ryble Branch Investment in Ryble Branch To correct accounts for error in recording branch net income ($840 $480 = $360). (5) Inventory of Supplies Investment in Ryble Branch To record receipt of supplies from branch. 5 6 0 5 6 0

2 0 0 0 2 0 0 0

3 6 0 3 6 0

2 2 0 2 2 0

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Yugo Company (concluded) c. Yugo Company Journal Entries in Accounting Records of Ryble Branch December 31, 2005
(1) Shipments from Home Office in Transit Home Office To record merchandise in transit from home office. (2) No journal entry required. (3) Cash in Transit Home Office To record remittance of cash from home office. (4) No journal entry required. (5) No journal entry required. 2 0 0 0 5 8 0 0

Pr. 44

5 8 0 0

2 0 0 0

d.

Yugo Company Reconciliation of Reciprocal Ledger Accounts December 31, 2005


Investment in Ryble Branch (In home office accounting records) Home Office (in Ryble Branch accounting records) $ 4 9 6 8 0 5 8 0 0 2 0 0 0 cr

Balances before adjustments (see a) Add: Shipment of merchandise in transit to branch Collection by branch of home office trade accounts receivable Correction of journal entry to record remittance of cash to branch Less: Correction of home office accounts for error in recording net income reported by branch Shipment of supplies by branch to home office Balances after adjustments

$ 5 5 5 0 0 dr 5 6 0 2 0 0 0 ( 3 6 0 ) ( 2 2 0 ) $ 5 7 4 8 0 dr

$ 5 7 4 8 0

cr

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40 Minutes, Easy Trudie Company a. Trudie Company Journal Entries for First Year of Operations (Perpetual Inventory System)
(1) In accounting records of Savoy Branch: Inventories ($110,000 x 1.40) Home Office To record merchandise received from home office. Cash Cost of Goods Sold Sales Inventories To record sales and cost of goods sold, determined on basis of prices billed to branch by home office. Operating Expenses Cash To record operating expenses. Cost of Goods Sold [($154,000 $70,000) $82,460] Inventories To adjust ending inventories at billed price to conform to physical count. Sales Income Summary Cost of Goods Sold ($70,000 + $1,540) Operating Expenses To close revenue and expense ledger accounts. Home Office Income Summary To close net loss for year. (2) In accounting records of home office: Investment in Savoy Branch Inventories Allowance for Overvaluation of Inventories: Savoy Branch ($110,000 x 0.40) To read merchandise shipped to Savoy Branch, billed at 40% above cost. Income: Savoy Branch Investment in Savoy Branch To record net loss for year reported by Savoy Branch. 1 5 4 0 0 0 1 5 4 0 0 0

Pr. 45

1 5 4 0 0 0

8 0 0 0 0 7 0 0 0 0 8 0 0 0 0 7 0 0 0 0

1 6 5 0 0 1 6 5 0 0

1 5 4 0 1 5 4 0

8 0 0 0 0 8 0 4 0 7 1 5 4 0 1 6 5 0 0

8 0 4 0 8 0 4 0

1 1 0 0 0 0 4 4 0 0 0

8 0 4 0 8 0 4 0

(Continued on page 164)

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Trudie Company (continued) Trudie Company Journal Entries for First Year of Operations (concluded) (Perpetual Inventory System)
Allowance for Overvaluation of Inventories: Savoy Branch Realized Gross Profit: Savoy Branch Sales To reduce allowance to amount by which ending inventories exceed cost, computed as follows: Balance of allowance before adjustment $44,000 Required balance after adjustment: $82,460 x 2/7 (a markup of 2/5 on cost is equivalent to a markup of 2/7 on billed price) 23,560 Required reduction of allowance $20,440 Realized Gross Profit: Savoy Branch Sales Income Summary Income: Savoy Branch To close branch net loss and realized gross profit account. (Income tax effects are disregarded.) 2 0 4 4 0

Pr. 45

2 0 4 4 0

2 0 4 4 0 1 2 4 0 0 8 0 4 0

b.

Trudie Company Journal Entries for First Year of Operations (Periodic Inventory System)
(1) In accounting records of Savoy Branch: Shipments from Home Office ($110,000 x 1.40) Home Office To record merchandise received from home office. Cash Sales To record sales. Operating Expenses Cash To record operating expenses. Sales Inventories (end of first year) Income Summary Shipments from Home Office Operating Expenses To record ending inventories and to close revenue and expense accounts. Home Office Income Summary To close net loss for year. 1 6 5 0 0 1 6 5 0 0 1 5 4 0 0 0 1 5 4 0 0 0

8 0 0 0 0 8 0 0 0 0

8 0 0 0 0 8 2 4 6 0 8 0 4 0 1 5 4 0 0 0 1 6 5 0 0

8 0 4 0 8 0 4 0

(Continued on page 165)

Trudie Company (concluded)

Pr. 45

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Trudie Company Journal Entries for First Year of Operations (concluded) (Periodic Inventory System)
(2) In accounting records of home office: Investment in Savoy Branch Shipments to Branch Allowance for Overvaluation of Inventories: Savoy Branch ($110,000 x 0.40) To record merchandise shipped to Savoy Branch, billed at 40% above cost. Income: Savoy Branch Investment in Savoy Branch To record net loss for year reported by Savoy Branch. Allowance for Overvaluation of Inventories: Savoy Branch Realized Gross Profit: Savoy Branch Sales To reduce allowance to amount by which ending inventories exceed cost (see part a). Realized Gross Profit: Savoy Branch Sales Income Summary Income: Savoy Branch To close branch net loss and realized gross profit account. (Income tax effects are disregarded.) 1 5 4 0 0 0 1 1 0 0 0 0 4 4 0 0 0

8 0 4 0 8 0 4 0

2 0 4 4 0 2 0 4 4 0

2 0 4 4 0 1 2 4 0 0 8 0 4 0

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60 Minutes, Medium Kosti-Marian Company a. KostiMarian Company Journal Entries in Accounting Records of Home Office
20 05 Dec. 31 Cash Investment in Branch To record cash deposits by branch not entered in accounting records of home office: Dec. 30, 2005 Dec. 31, 2005 Total cash deposits not recorded $1,100 600 $1,700 1 0 0 0 0

Pr. 46

1 7 0 0 1 7 0 0

31 Shipments to Branch Allowance for Overvaluation of Branch Inventories To record intracompany markup on merchandise shipments to branch: $110,000 ($110,000 1.1) = $10,000

1 0 0 0 0

b.

Kosti-Marian Company Journal Entries in Accounting Records of Branch

20 05 Dec. 31 Cash in Transit Home Office To record reimbursement check mailed by home office; the check is in transit. 31 Shipments from Home Office in Transit Home Office To record shipment of merchandise in transit. 31 Freight-in from Home Office Current Liabilities To record freight on shipment in transit ($5,500 x 0.05 = $275).

1 8 0 0 1 8 0 0

5 5 0 0 5 5 0 0

2 7 5 2 7 5

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Kosti-Marian Company (concluded) c. Kosti-Marian Company Working Paper for Combined Financial Statements of Home Office and Branch For Year Ended December 31, 2005 (Periodic Inventory System: Billings above Cost)
Adjusted trial balances Home office dr (cr) Income statement Sales Inventories, Jan. 1, 2005 Purchases Shipments to branch Shipments from home office Freight-in from home office Inventories, Dec. 31, 2005 Operating expenses Net income (to statement of retained earnings below) Totals Statement of retained earnings
Retained earnings, Jan. 1, 2005

Pr. 46

Branch dr (cr)

Eliminations dr (cr)

Combined dr (cr) ( 3 1 3 7 0 0 ) 3 3 5 5 0 1 9 0 0 0 0

( 1 6 2 1 9 ( 1 0

9 3 0 0

0 0 0 0

0 0 0 0

0 ) 0 0 0 )

( 1 4 4 7 0 0 ) 1 1 5 5 0

(b)

( 1 0 0 0 )

( 3 0 0 0 0 ) 4 2 0 0 0 4 4 0 0 0 - 0 -

1 1 0 5 ( 1 6 2 4

0 5 1 3

0 0 7 0

(a) 1 0 0 0 0 0 0 (a)( 1 1 0 0 0 0 ) 0 0 )* (c) 1 4 0 0 0 (d) 9 6 0 0 S

5 5 0 0 ( 4 4 7 7 0 ) 6 6 3 0 0 6 3 1 2 0 - 0 -

9 5 2 0 - 0 -

( 3 4 0 0 0 ) ( 4 4 0 0 0 ) 1 5 0 0 0 ( 9 5 2 0 ) (d) ( 9 6 0 0 )

( 3 4 0 0 0 ) ( 6 3 1 2 0 ) 1 5 0 0 0 8 2 1 2 0 - 0 -

Net (income) (from income statement above) Dividends declared


Retained earnings, Dec. 31, 2005

(to balance sheet below) Totals Balance sheet Cash Inventories, Dec. 31, 2005 Investment in branch Allowance for overvaluation of branch inventories Other assets (net) Current liabilities Common stock, $2.50 par Retained earnings (from statement of retained earnings above) Home office Totals * ($9,900 + $5,500) x 1.05 = $16,170. (a) (b) (c) (d) (e) To eliminate reciprocal ledger accounts for merchandise shipments. To reduce beginning inventories of branch to cost: $11,000 ($11,000 1.1) = $1,000. To reduce ending inventories of branch of cost: $15,400 ($15,400 1.1) = $1,400. To increase net income of home office by portion of merchandise markup that was realized: $11,000 $1,400 = $9,600. To eliminate reciprocal ledger account balances.

2 3 7 0 0 3 0 0 0 0 5 8 3 0 0 ( 1 1 0 0 0 ) 1 9 7 0 0 0 ( 3 5 0 0 0 ) ( 2 0 0 0 0 0 )

1 1 9 7 5 1 6 1 7 0

(c) ( 1 4 0 0 ) (e) ( 5 8 3 0 0 ) (a) (b) 1 0 0 0 0 1 0 0 0

3 5 6 7 5 4 4 7 7 0

4 8 4 5 0 ( 8 7 7 5 )

2 4 5 4 5 0 ( 4 3 7 7 5 ) ( 2 0 0 0 0 0 )

( 8 2 1 2 0 ) ( 5 8 3 0 0 ) - 0 - 0 (e) 5 8 3 0 0 - 0 - 0 -

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Solis Company a.

30 Minutes, Medium
Solis Company Working Paper for Combined Financial Statements of Home Office and Branch For Year Ended December 31, 2005 (Periodic Inventory System: Billings at Cost)
Adjusted trial balances Home office dr (cr) Branch dr (cr) ( 1 0 1 1 0 0 ) 8 5 8 0 0 2 1 9 0 0 Eliminations dr (cr)

Pr. 47

Combined dr (cr) ( 4 9 5 1 0 0 ) 2 8 6 3 0 0 9 1 4 0 0

Income statement Sales Cost of goods sold Operating expenses Net income (loss) (to statement of retained earnings below) Totals Statement of retained earnings Retained earnings, Dec. 31, 05 Net (income) loss (from income statement above) Dividends declared Retained earnings, Dec. 31, 05 (to balance sheet below) Totals Balance sheet Cash Notes receivable Trade accounts receivable (net) Inventories Investment in branch Furniture and equipment (net) Trade accounts payable Common stock, $2 par Retained earnings (from statement of retained earnings above) Home Office Totals

( 3 9 4 0 0 0 ) 2 0 0 5 0 0 6 9 5 0 0

1 2 4 0 0 0 - 0 -

( 6 6 0 0 ) - 0 -

1 1 7 4 0 0 - 0 -

( 2 5 0 0 0 ) ( 1 2 4 0 0 0 ) 3 0 0 0 0 6 6 0 0

( 2 5 0 0 0 ) ( 1 1 7 4 0 0 ) 3 0 0 0 0 1 1 2 4 0 0 - 0 -

4 6 0 0 0 7 0 0 0 8 0 4 0 0 9 5 8 0 0 8 2 7 0 0 4 8 1 0 0 ( 4 1 0 0 0 ) ( 2 0 0 0 0 0 )

1 4 6 0 0

6 0 6 0 0 7 0 0 0 1 1 7 7 0 0 1 2 0 0 0 0 (a) ( 8 2 7 0 0 ) 4 8 1 0 0 ( 4 1 0 0 0 ) ( 2 0 0 0 0 0 )

3 7 3 0 0 2 4 2 0 0

( 1 1 2 4 0 0 ) ( 8 2 7 0 0 ) - 0 - 0 (a) 8 2 7 0 0 - 0 - 0 -

(a)

To eliminate reciprocal ledger account balances.

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Solis Company (concluded) b. Solis Company Closing Entries for Branch


20 05 Dec. 31 Sales Income Summary Cost of Goods Sold Operating Expenses To close revenue and expense ledger accounts. 31 Home Office Income Summary To transfer net loss to Home Office ledger account.

Pr. 47

1 0 1 1 0 0 6 6 0 0 8 5 8 0 0 2 1 9 0 0

6 6 0 0 6 6 0 0

c.

Solis Company Adjusting and Closing Entries for Home Office

20 05 Dec. 31 Loss: Branch Investment in Branch To record net loss reported by branch. 31 Sales Cost of Goods Sold Operating Expenses Loss: Branch Income Summary To close revenue and expense ledger accounts. 31 Income Summary Retained Earnings To close combined net income to Retained Earnings ledger account.

6 6 0 0 6 6 0 0

3 9 4 0 0 0 2 0 0 5 6 9 5 6 6 1 1 7 4 0 0 0 0 0 0 0 0

1 1 7 4 0 0 1 1 7 4 0 0

50 Minutes, Medium

Solutions Manual, Chapter 4

The McGraw-Hill Companies, Inc., 2006 169

Calco Corporation a. Calco Corporation Journal Entries in Accounting Records of Home Office
20 05 Dec. 31 Equipment: Branch Investment in Branch To record acquisition of equipment by branch. 31 Cash in Transit Investment in Branch To record cash in transit from branch. 31 Sales Shipments to Branch Investment in Branch To eliminate shipments to branch from sales ($45,000 + $3,000 = $48,000) and to record shipments at cost ($48,000 1.2 = $40,000). 31 Inventories, Dec. 31, 2005 Income Summary To record ending inventories. 6 0 0 0 0

Pr. 48

5 0 0 5 0 0

5 0 0 0 5 0 0 0

4 8 0 0 0 4 0 0 0 0 8 0 0 0

6 0 0 0 0

b.

Calco Corporation Journal Entries in Accounting Records of Branch

20 05 Dec. 31 Home Office Trade Accounts Receivable To record collection of trade accounts receivable by home office. 31 Operating Expenses Home Office To correct amount of expenses allocated to branch by home office ($5,000 $500 = $4,500). 31 Shipments from Home Office in Transit Home Office To record shipment in transit from home office. 31 Home Office Shipments from Home Office To eliminate intracompany markup on merchandise received from home office ($48,000 x 1/6 = $8,000). 31 Inventories, Dec. 31, 2005 Income Summary To record ending inventories [($18,000 + $3,000) x 5/6 = $17,500; $2,000 + $17,500 = $19,500].

2 0 0 0 2 0 0 0

4 5 0 0 4 5 0 0

3 0 0 0 3 0 0 0

8 0 0 0 8 0 0 0

1 9 5 0 0 1 9 5 0 0

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Calco Corporation (concluded) c. Calco Corporation Working Paper to Summarize Operations For Year Ended December 31, 2005
Revenue and Expenses Sales Cost of goods sold: Inventories, Jan. 1, 2005 (at cost) Purchases Shipments to branch (at cost) Cost of goods available for sale Less: Inventories, Dec 31, 2005 Cost of goods sold Gross margin on sales Operating expenses Net income (1) (2) (3) (3) $450,000 $48,000 = $402,000. ($18,000 + $3,000) x 5/6 = $17,500; $2,000 + $17,500 = $19,500. $16,000 + $4,500 = $20,500. Home Office $ 4 0 2 0 0 0 (1) Branch $ 1 0 0 0 0 0

Pr. 48

Combined $ 5 0 2 0 0 0

7 0 0 0 0 2 9 0 0 0 0 ( 4 0 0 0 0 )

1 5 0 0 0 2 4 0 0 0 4 0 0 0 0 7 9 0 0 0 1 9 5 0 0 (2) 5 9 5 0 0 4 0 5 0 0 2 0 5 0 0 (3) 2 0 0 0 0

8 5 0 0 0 3 1 4 0 0 0

$ 3 2 0 0 0 0 6 0 0 0 0 $ 2 6 0 0 0 0 $ 1 4 2 0 0 0 5 5 0 0 0 $ 8 7 0 0 0

$ $ $

$ 3 9 9 0 0 0 7 9 5 0 0 $ 3 1 9 5 0 0 $ 1 8 2 5 0 0 7 5 5 0 0 $ 1 0 7 0 0 0

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Kreshek Company a.

60 Minutes, Medium
Kreshek Company Reconciliation of Investment in Lee Branch Ledger Account and Home Office Account For Quarter Ended April 30, 2005
Investment in Lee Branch ledger account (home office accounting records) Debit Credit Debit Home Office ledger account (branch accounting records)

Pr. 49

Credit $ 1 4 3 0 4 0

Balances before adjustments Add: Transposition error in recording shipment from home office ($7,840 recorded as $7,480) Collection by branch of home office trade accounts receivable Shipment delivered to branch on Feb. 14 not recorded (but should be) as payable by home office Corrected branch net income ($13,710 $360 $1,200 $250 = $11,900) Operating expenses charge able to branch, $1,200, and loss on disposal of branch equipment, $250 Less: Reduction in preliminary net income recorded in Home Office ledger account: Operating expenses not recorded Understatement of shipments from home office ($7,840 $7,480) Loss on disposal of branch equipment Repair bill paid by branch for home office Excess merchandise returned by branch to home office not recorded by home office Subtotals Balances after adjustments Totals

$ 1 3 3 9 7 0

3 6 0

3 5 0

3 5 0

2 7 5 0

1 1 9 0 0

1 4 5 0

1 2 0 0

3 6 0 2 5 0 $ 3 7 5

5 2 0 5 $ 1 4 8 9 7 0 $ 1 4 8 9 7 0 $ 5 5 8 0 1 4 3 3 9 0 $ 1 8 1 0 1 4 3 3 9 0 $ 1 4 5 2 0 0 $ 1 4 5 2 0 0

$ 1 4 8 9 7 0

$ 1 4 5 2 0 0

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Kreshek Company (continued) b. Kreshek Company Correcting Entries in Accounting Records of Lee Branch
20 05 Apr 30 Cost of Goods Sold Home Office To correct error in recording amount of merchandise received from home office on Feb. 8, 2005 [($49.00 $46.75) x 160 = $360]. 30 Trade Accounts Receivable Home Office To record collection of trade accounts receivable of home office previously recorded in error as collection of branch trade accounts receivable. 30 Operating Expenses Loss on Disposal of Equipment Home Office To record operating expenses allocated to branch by home office and loss reported on disposal of branch equipment. 30 Home Office Income Summary To correct preliminary net income recorded for quarter ended Apr. 30, 2005: $1,200 + $360 + $250 = $1,810.

Pr. 49

3 6 0 3 6 0

3 5 0 3 5 0

1 2 0 0 2 5 0 1 4 5 0

1 8 1 0 1 8 1 0

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Kreshek Company (concluded) c. Kreshek Company Correcting Entries in Accounting Records of Home Office
20 05 Apr 30 Investment in Branch Trade Accounts Receivable To record collection by branch of home office trade accounts receivable. 30 Investment in Branch Trade Accounts Payable To record liability for merchandise received by branch on Feb. 14, 2005. 30 Investment in Branch Income: Branch To record net income of branch for quarter ended Apr. 30, 2005: $13,710 $1,810 = $11,900. A 30 Repairs Expense (or Trade Accounts Payable, if previously recorded) Investment in Branch To record repair bill paid by branch on Apr. 29, 2005. 30 Inventories in Transit Investment in Branch To record excess merchandise returned to home office by branch on Apr. 30, 2005.

Pr. 49

3 5 0 3 5 0

2 7 5 0 2 7 5 0

1 1 9 0 0 1 1 9 0 0

3 7 5 3 7 5

5 2 0 5 5 2 0 5

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60 Minutes, Strong Arnies a. Arnies Journal Entries in Accounting Records of Home Office

Pr. 410

20 05 Dec. 31 Arnold Nance, Capital Allowance for Overvaluation of Inventories: Vida Branch To establish allowance for overvaluation of beginning inventories of branch [$6,000 ($6,000 1.25) = $1,200]. 31 Sales Cost of Goods Sold Allowance for Overvaluation of Inventories: Vida Branch To correct journal entries for shipments of merchandise to branch ($105,000 1.25 = $84,000). 31 Cash in Transit Investment in Branch To record cash in transit from branch: Dec. 30, 2005 Dec. 31, 2005 Total cash in transit

1 2 0 0 1 2 0 0

1 0 5 0 0 0 8 4 0 0 0 2 1 0 0 0

1 0 0 0 0 1 0 0 0 0 $ 3,000 7,000 $10,000

b.

Arnies Journal Entries in Accounting Records of Vida Branch

20 05 Dec. 31 Operating Expenses Home Office To record expense allocated to branch by the home office. 31 Cash in Transit Home Office To record cash in transit from home office. 31 Inventories in Transit Home Office To record shipment of merchandise in transit from home office, determined as follows: Inventories, Jan. 1, 2005 $ 6,000 Shipments from home office 105,000 Subtotal $111,000 Less: Cost of goods sold per branch accounting records $93,000 Inventories, Dec. 31, 2005, per branch accounting records 8,000 101,000 Shipment of merchandise in transit from home office $ 10,000

1 2 0 0 0 1 2 0 0 0

3 0 0 0 3 0 0 0

1 0 0 0 0 1 0 0 0 0

Arnies (continued)

Pr. 410

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c.

Arnies Working Paper for Combined Financial Statements of Home Office and Branch For Year Ended December 31, 2005 (Period Inventory System: Billings above Cost)
Adjusted trial balances Home office dr (cr) Vida Branch dr (cr) ( 1 6 0 0 0 0 ) 9 3 0 0 0 4 8 0 0 0 1 9 0 0 0 - 0 Eliminations dr (cr) Combined dr (cr) ( 4 4 5 0 0 0 ) 2 4 0 4 0 0 1 1 8 0 0 0 8 6 6 0 0 - 0 -

Income statement Sales Cost of goods sold Operating expenses Net income (to statement of proprietors capital below) Totals Statement of proprietors capital Arnold Nance, capital Jan. 1, 05 Net (income) (from income statement above) Arnold Nance, drawing Arnold Nance, capital Dec. 31, 2005 (to balance sheet below) Totals Balance sheet Cash Trade accounts receivable (net) Inventories Investment in Vida Branch Allowance for overvaluation of inventories: Vida Branch Equipment (net) Trade accounts payable Accrued liabilities Note payable, due 2008 Home office Arnold Nance, capital (from statement of proprietors capital above) Totals (a) (b) (c)

( 2 8 5 0 0 0 ) 1 6 6 0 0 0 7 0 0 0 0 4 9 0 0 0 - 0 -

(a) ( 1 8 6 0 0 )

(b)

1 8 6 0 0

( 1 9 0 8 0 0 ) ( 4 9 0 0 0 ) 5 0 0 0 0 ( 1 9 0 0 0 ) (b) ( 1 8 6 0 0 )

( 1 9 0 8 0 0 ) ( 8 6 6 0 0 ) 5 0 0 0 0 2 2 7 4 0 0 - 0 -

4 2 4 3

1 0 0 5

0 0 0 0

0 0 0 0

0 0 0 0

1 6 0 0 0 2 2 0 0 0 1 8 0 0 0

(a) ( 3 6 0 0 ) (c) ( 3 5 0 0 0 ) (a) 2 2 2 0 0

5 7 0 0 0 4 2 0 0 0 5 4 4 0 0

( 2 2 2 0 0 ) 1 5 0 0 0 0 ( 2 3 0 0 0 ) ( 2 0 0 0 ) ( 5 1 0 0 0 ) ( 3 5 0 0 0 )

1 5 0 ( 2 3 ( 2 ( 5 1 (c) 3 5 0 0 0

0 0 0 0

0 0 0 0

0 0 ) 0 ) 0 )

( 2 2 7 4 0 0 ) - 0 - 0 - 0 - 0 -

To reduce ending inventories ($18,000 x 0.20 = $3,600) and cost of goods sold ($93,000 x 0.20 = $18,600) of branch to cost, and to eliminate balance of Allowance for Overvaluation of Inventories: Vida Branch ledger account. To increase net income of home office by portion of merchandise markup that was realized by branch sales. To eliminate reciprocal ledger account balances.

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Arnies (concluded) d. Arnies Adjusting and Closing Entries in Accounting Records of Home Office
20 05 Dec 31 Investment in Vida Branch Income: Vida Branch To record net income reported by branch. 31 Allowance for Overvaluation of Inventories: Vida Branch Realized Gross Profit: Vida Branch Sales To reduce allowance to amount by which ending inventories of branch exceed cost. 31 Income: Vida Branch Realized Gross Profit: Vida Branch Sales Sales Cost of Goods Sold Operating Expenses Income Summary To close revenue and expense accounts. 31 Income Summary Arnold Nance, Capital To close Income Summary ledger account (net income for year) to proprietors capital account. 31 Arnold Nance, Capital Arnold Nance, Drawing To close proprietors drawing ledger account to proprietors capital account. 8 6 6 0 0

Pr. 410

1 9 0 0 0 1 9 0 0 0

1 8 6 0 0 1 8 6 0 0

1 9 0 0 0 1 8 6 0 0 2 8 5 0 0 0 1 6 6 0 0 0 7 0 0 0 0 8 6 6 0 0

8 6 6 0 0

5 0 0 0 0 5 0 0 0 0

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